Diverging paths: EU-niversal and UK due diligence requirements for securitisations

The European Commission published a report on the functioning of the EU securitisation regulation on 10 October 2022 (the SECR Report) which provides that EU institutional investors are required to obtain full Article 7 information in relation to third-party securitisations. This de facto excludes EU institutional investors from investing in most third-country securitisations because they are not able to obtain all of the relevant information from third-country originators, sponsors or SSPEs, including information that is required to be provided using the ESMA reporting templates. In response, a number of industry bodies representing the securitisation industry, including AFME, AIMA and ICMA, wrote to the Joint Committee of the European Supervisory Authorities (the ESAs) on 9 December 2022 to propose that the ESAs issue guidance to enforce Article 5(1)(e) in a proportionate and risk-based manner which would allow local regulators to consider the type and extent of the reliable information available to investors, regardless of the format or source before enforcing any non-compliance with Article 5(1)(e) (the Proposal). On 11 October 2023, the ESAs published their response (the ESA Response) to the request for proportionate and risk-based enforcement of Article 5(1)(e) of the EU securitisation regulation.

In the ESA Response, the ESAs rejected the Proposal. While the ESAs acknowledged the difficulties faced by EU institutional investors, they deferred to the SECR Report which found that differentiating the scope of information to be provided depending on the location in which the reporting entity is located is not in line with the legislative intent of the Level 1 text and that changes to the Level 1 text are required to address the fundamental issues around third-country securitisations. ESMA is considering amendments to simplify the reporting templates for private securitisations and the ESAs have left the door open for consultations on potential amendments to the reporting templates and enhancements to the Level 1 text, but it does not seem as though there will be much movement in the near future. However, the due diligence requirements for UK securitisations are changing.

The FCA published a consultation paper in August 2023 in respect of the forthcoming repeal and replacement of the retained EU law in relation to securitisations and proposed a more principles-based and proportionate approach to the due diligence requirements for UK securitisations which would require a UK investor to verify certain matters, but more generally, be comfortable that it had received sufficient information to enable it to independently assess the risk of investing in a UK securitisation. This was followed on 28 November 2023 by the draft statutory instrument for the new UK securitisation regulations which reduces the scope of the existing due diligence requirements by confirming that non-UK Alternative Investment Fund Managers shall no longer be subject to the due diligence regime. It also delegates authority to the FCA and PRA to set out the due diligence requirements for institutional investors under their supervision, which will enable the regulators to implement their proposals and establish a far more flexible regime than that which currently applies in the EU. The statutory instrument is currently undergoing parliamentary approval and is expected to come into force alongside new FCA and PRA rules at the same time as Parliament commences the repeal of the existing retained EU law. Given the juxtaposition of the EU and UK approaches, we can expect this to be a point of contention for years to come.